I mentioned in my previous post that I have made some changes to how we invest our money this year and one of them was starting to contribute to Roth IRA accounts again, though we don’t qualify to make direct contributions. The advantage of Roth IRA over Traditional IRA has been discussed extensively, such as tax […]

I mentioned in my previous post that I have made some changes to how we invest our money this year and one of them was starting to contribute to Roth IRA accounts again, though we don’t qualify to make direct contributions.

The advantage of Roth IRA over Traditional IRA has been discussed extensively, such as tax free withdrawal and no required minimum distributions after the age of 70.5, etc. We have been making non-deductible contributions for years, first to Roth IRA accounts, then to Traditional after we reached the income limit that prohibits us from adding new money into the accounts (you don’t have to know everything before opening an IRA account). Even though there was always the opportunity to do a one-time conversion from Traditional to Roth in the past, we never took that step because our IRA accounts were still relatively small, thus the benefit of the conversion was rather small if we could only keep contributing to Traditional. Then, in 2009 a new law opened the door to convert existing Traditional IRA accounts into Roth regardless the income. Furthermore, it also makes it possible for people like us who are not eligible to make Roth contributions to actually continue funding their Roth accounts through conversion, year after year, until Congress decides to shut that door again.

When the conversion first became available in 2010, I looked into the idea, but decided not to convert for our existing accounts. From what I read about the pros and cons of IRA conversion, the two determining factors are now and future tax rates and source of funds to pay for the taxes resulted from the conversion. Since the Traditional to Roth conversion is considered distribution, which is a taxable event, taxes are due at the time of the conversion for deductible Traditional contributions and for all the earnings from the conversion. The argument was that if one has to use funds from the IRA account to pay for the tax bill, then it doesn’t make too much sense to convert, especially if the IRA is large. For us, since our accounts are quite small and our contributions were all after tax, we will be only responsible for the taxes on the earnings, thus the tax bill isn’t really the biggest concern. My decision was mainly based on the assumption that our marginal tax rates at the time when we retire will be lower than the rates we are taxed right now.

For the tax rates, the comparison seems to be quite simple to make. Currently, our incomes are our wages, which are taxed at much higher rate. Because none of us has pension, the sources of income in our retirement will mostly come from Social Security, if it’s still there, and from savings that we set aside right now, 401(K)s, IRAs, and savings outside tax-deferred retirement accounts. For 401(K)s, since contributions were all made pre-tax, any withdrawal in the future, including both the contributions and gains, will be taxed. For IRAs and other savings, however, only the earnings will be taxed because of after-tax contributions. So looking at our situations, it doesn’t seem to be difficult to come to the conclusion that our tax rate in retirement will most likely be lower than our current income tax rate, even though nothing is certain. Based on this, I chose not to convert our existing Traditional IRA accounts, which also include 401(K)s rolled over after previous jobs, which could result in taxes on earnings and pre-tax contributions to those 401(K) plans at the current tax rate.

However, I still like Roth IRAs more than Traditional IRAs for the 100% tax free withdrawal after 59.5 years old, especially since we are making after tax contributions right now any way. The only problem is to find a way to fund the accounts, which turned out to be quite simple. In the past, I always made small monthly contributions to the IRA accounts throughout the year. But for 2013, I chose to fund the Traditional IRA accounts at once then convert them into Roth immediately before any earnings or gains occur. With both our Traditional and Roth accounts at Vanguard, the process was rather easy. Here is what I did:

Open new Traditional IRA accounts at Vanguard and fund them to the maximum amount allowed ($5,500 for 2013)

The Vanguard mutual fund for the new accounts is the Prime Money Market fund, not any other mutual funds

After a day or two, the new accounts with the new money will be available, then I will do the conversions to Roth, even before the money is settled in the new Traditional accounts.

Converting a Traditional IRA to a Roth, called Exchange, is also straightforward at Vanguard, a few mouse clicks and it is done. To do the conversion after logging into the account, select Buy & Sell from the top of the screen, then click Exchange Vanguard Funds and follow the steps to complete the conversion.

The process is very simple, taking only a few minutes to complete. Of course, the conversion can be done at any time of the year. The reason I chose to convert right after the contributions are made is that by doing so, there’s no earning generated, thus no tax needs to be paid for the conversion.

This time last year, I left my previous employer after nearly three years. With the new job, there were quite some changes in addition to new responsibilities at work. Among them, rolling over my old 401(K) plan to an IRA account was the last item on the to-do list and I didn’t do the rollover […]

This time last year, I left my previous employer after nearly three years. With the new job, there were quite some changes in addition to new responsibilities at work. Among them, rolling over my old 401(K) plan to an IRA account was the last item on the to-do list and I didn’t do the rollover until only a couple of weeks ago, nearly one year after I left the old job (the other rollover took me even longer to do). The reason for the delay was entirely because of my laziness. The old 401(K) account was with Fidelity invested in mutual funds and, other than the funds’ normal expenses, I don’t pay additional administrative fee or maintenance fee to have my investments under my old employer’s management (see how much your 401(K) plan is costing you). Hence, the long delay, even though the choices of investments might not be exactly what I wanted (the funds the plan offered were not generally available funds, so it’s difficult to make a direct performance or cost comparison). Actually, if the funds were generally available Fidelity funds, I probably would just keep them where they were.

Early this month, I finally made the move to rollover the old 401(K) account to an IRA account and the process didn’t involve Vanguard. In stead I chose Fidelity for several reasons: First, the 401(K) account is already at Fidelity, so rolling it over to an IRA account at Fidelity has the least delay/disruption and requires minimal work from me. Second, we already have IRA accounts at Vanguard, so I don’t want to put all my eggs in one basket. Finally, there are a few funds I quite like at Fidelity.

Of course, since the funds I owned in my 401(K) account were not standard Fidelity funds, it was impossible to roll them over as in-kind, which also means that I had to first liquidate my entire account before using the money to buy Fidelity funds. The process itself was very straightforward and smooth, all done online in a couple of minutes. However, there is one thing I don’t like about Fidelity 401(K) rollover is that it doesn’t have the option to invest the money during the process of opening a new Rollover IRA account. At Vanguard, I can choose how I want to invest the fund coming to Vanguard, so when the money arrives (many times you don’t know when it will arrive from an external institution), it would be invested right away based on my instruction. That’s not the case at Fidelity though. All I could do was having the money as cash in the new account, then selecting funds I want to buy at a later time when the money is in. If I don’t want the money in the account doing nothing, I basically have to constantly monitor the account. Since I have both the source and destination at Fidelity, it took only one day for the money to be available, so I didn’t have to check every day, but it was inconvenient at least. In fact, because I had to make my investment selections at a later time, I even got a call from a local Fidelity representative asking about my plan for investing the money after the account was rolled over.

As for my investment choices, I chose a simple but diversified asset allocation that is very heavy on equity because there will be more then 20 years before I need to tap into my retirement savings and stocks are the best option for long-term growth. Here’s what I have in my new Fidelity Rollover IRA account at the end:

Since I already own FCNTX and FIGRX in another IRA account at Fidelity, I basically just treated the two accounts as one when allocating the assets. I have long been a fan of small-/mid-cap funds, owning a few in different accounts as I believe small-cap or mid-cap funds generally outperform large-cap funds in the long-term, and FLPSX is my choice in that category.

Going forward, there will be no new money added to the accounts (annual contributions in IRA go to accounts at Vanguard), so all I need to do is rebalancing the funds periodically to stay with the allocation target

We don’t get a lot of mail from the government. The one that we did get in the past were our Social Security benefit statement that arrived at our house every year. Since the statements were only issued on an annual basis, we didn’t pay any attention to them until they were in our hands, […]

We don’t get a lot of mail from the government. The one that we did get in the past were our Social Security benefit statement that arrived at our house every year. Since the statements were only issued on an annual basis, we didn’t pay any attention to them until they were in our hands, and there isn’t any expectations. We did, however, go through it carefully and compared the numbers from previous statements to see what have changed in one year, because the numbers, though only a few, in the statement will be part of our financial well being in our retirement (well, according to current projection, we may not see any benefit at all when we reach the retirement age if politicians don’t do anything to fix the system).

However, that annual correspondence from Uncle Sam stopped last year after the government decided to stop mailing paper Social Security statement to save money. Taking the place of paper statements, everyone can instead check their benefits from Social Security Administration website, at any time. To me, I am all for using electronic means to deliver statements, bills, and confirmations, etc, because that saves me the trouble of storing and eventually destroying all the paper coming our way. So it is a change that I like, even though for documents like SS benefit statements, I actually prefer to have a hard copy to keep as my records.

Anyway, the last SS benefit mail we received was for the year 2009 which arrived in early 2010, and it went for nearly two years for us without a statement. I guess there’s only one drawback of having the statement accessible online: Now it’s up to us to GET it, not the government to DELIVER it to us. If we don’t remember to do it, the idea of checking the report will just slip away since we only need to do it once a year. Later last month, I finally got the chance to open an account online and got to see my statement for the first time in two years.

I didn’t know exactly why I delayed so long since the whole process is rather straightforward. If you haven’t reviewed your Social Security statement online yet, here’s what you need to do. Before you can account your statement, you will need to go to http://www.ssa.gov/mystatement/ to create an account. Creating an online account takes less than 10 minutes. First, you provide your personal information such as Name, SSN, Date of Birth, Home Address, and Phone Number. These information is used to verify your identity, which is the second step. You will be asked a few questions that appear to come from your credit report, such as when did you open a mortgage loan or with which mortgage company, etc. Once your identity is secured, you can create an account by setting up an user name and a password so you can use your credential to access your statement online at any time later. That’s it.

After completing the account set up process, you can log into your newly created account and view your statement online. From there, you will see the identical information as you used to see on your paper statement, such as your estimated Social Security benefit information at full retirement age (age 65), at age 70, and at early age (age 62), disability benefits and benefits for family members, and your full earnings record from the time you started to pay Social Security taxes. In addition to reviewing the benefits, it is always important to check the accuracy of your earnings information because your future benefits depend on your reported earnings.

While it’s very convenient to access my report online at any time, I can also download a copy of my report in PDF file, so I can print out a hard copy for my record, just as what I used to get from the government

BTW, a week also after creating the account, you will get a confirmation from the Social Security Administration about the account you just created and when you created it and information on how to get help if you have any question.

As you have already known the 2011 tax deadline is April 17th, which means it’s not only the due date to file 2011 income taxes, but also the last day to make 2011 IRA contributions and take advantage of last year’s tax deduction, if eligible, not to mention saving for the future. So if you are […]

As you have already known the 2011 tax deadline is April 17th, which means it’s not only the due date to file 2011 income taxes, but also the last day to make 2011 IRA contributions and take advantage of last year’s tax deduction, if eligible, not to mention saving for the future. So if you are considering an IRA account, Roth or Traditional, there is still plenty of time to act before the deadline.

I have written in the past about how to open an IRA account. Even though I consider myself an aggressive investor, holding more than 90% of investments in stocks, many of them in individual stocks, I don’t own any individual stock in IRA accounts. The main reason is that there’s no additional cost when buying and selling mutual fund shares. Also since an IRA account is supposed to be a place for long term investments, I’d rather use low cost index funds to invest in the broad market than trying to pick and choose which stock to buy. Though we originally had IRA accounts at Scottrade and bought a few mutual funds from different fund companies in those accounts, we have moved both our IRA accounts to Vanguard some time ago and we are now investing in Vanguard funds only. In addition to traditional mutual funds, we also added a couple of Vanguard ETFs in IRA accounts recently after it started to offer commission free ETFs to its customers.

So when it comes to where to open an IRA account, the first question I want to ask is what exactly you want to buy in the account. For us, low cost index funds are always the first choice because we want to keep investment costs low, which will have a significant impact on the overall return of the investments in the long term, and, meanwhile, get broad exposure to different asset classes. With these considerations in mind, going directly with fund companies like Vanguard became the obvious choice. When buying funds directly from the fund company, instead of through a third party like a broker, there is no additional cost associated withe the transaction. Yes, we do have ETFs, but they are essentially index funds. Plus, we don’t pay commissions when buying Vanguard ETFs from Vanguard IRA accounts.

If individual stocks or ETFs are your choice of investments in IRA accounts, then you may want to open an account with a brokerage firm, not a mutual fund company. Vanguard doesn’t charge commission only when you trade Vanguard ETFs; for other non-Vanguard ETFs, you will pay regular commissions, just like with any other brokerage account. Thus, commission charge is definitely a factor when choosing a brokerage firm for your IRA account. But that’s not all. Some brokers may charge an annual maintenance fee for IRA accounts. Following is a list of online discount brokers that offer IRA retirement accounts and fees, account minimum, and incentive for new or rollover IRA account.

The good news is that most brokers don’t charge annual fee for IRA accounts these days (with only one exception) and most have very low minimum initial deposit requirement as well. That makes opening an IRA account at a broker much more *affordable* especially when you consider that many mutual fund companies do have a much higher initial investment requirement (usually $500 or $1,000) for their funds. Of course, commissions apply when trading stocks or ETFs in an IRA account at a brokerage firm.

As you may know already, Vanguard isn’t the only broker which offers commission-free ETF trades. Charles Schwab, Fidelity, Scottrade, and TD Ameritrade all have their own free ETFs, though the number of ETFs that are eligible for zero commission varies at different firm. If you are considering buying ETFs for free, these firms may also be an option for your IRA account.

*Options House 100 commission-free trades: Open an Options House IRA account with $3,000 and promo code IRAFREE. Also get up to $125 reimbursement.
**Scottrade 3 commission-free trades: Open a Scottrade IRA account with promo code KGKP0724.
***E*Trade up to $500 credit: When rollover to E*Trade.

At the beginning of this month, Congress was finally able to hammer out a compromise to the debt resolution standoff that had split the two political parties quite divisively over the last several months. The agreement is far from a perfect solution and is already drawing criticism from both sides but it does prevent the […]

At the beginning of this month, Congress was finally able to hammer out a compromise to the debt resolution standoff that had split the two political parties quite divisively over the last several months. The agreement is far from a perfect solution and is already drawing criticism from both sides but it does prevent the United States from defaulting on its sovereign debt for at least the near term.

What’s less clear is exactly where this $2.5 trillion deficit reduction (this number comes from President Obama himself) will come from. One can assume that areas like defense spending will be cut but there’s probably a high likelihood that we’ll see programs like Medicare and Social Security affected as well. Social Security benefits for current retirees will probably remain but future retirees could very well see a very different program soon.

Cuts to Social Security could come in many different forms. One of the more likely possibilities is raising the retirement age. Right now, a retiree can apply for full retirement benefits at the age of 67 but they can also apply for a reduced early benefit as early as age 62. Under an amended program, there has been talk of moving the retirement age to 70 years old and the early retirement age to either 64 or 65. This move would not only help shore up a system that’s in need of an overhaul to simply stay afloat but also help lessen the burden on the federal debt.

Another option is to raise the amount of income that can be taxed. Right now, Social Security taxes are levied on income up to $106,800. Raising this ceiling increases the amount of money that will go into the coffers thus extending the life of the Social Security program but also giving the government a much needed additional revenue source. In short, if you’re a high earner, expect to be shouldering a good chunk of the load.

And while the government may be increasing Social Security taxes they may very well be decreasing benefits to go along with it. It goes without question that Social Security benefits is a significant financial outlay for the government and finding a way to reduce that outlay (or conversely increase the return that money already in the system can earn) might become a higher priority in the next debt resolution proposal.

The annual cost of living adjustment could be another feature that is affected. This made news in the recent past as the Social Security Administration announced that they were making no cost of living increase to monthly payments. The monthly adjustment is currently being tied to the inflationary price increases but it could end up being linked to a broader consumer price index which would be expected to rise at a slower rate than the current scale.

The Social Security system can’t exist in its current form for the long term but it’s not necessarily just because of the solvency of the system. Changes made to the system now will have implications on how the current debt standoff comes to a resolution. And in just about any scenario, it’s the taxpayer that’s going to end up footing the bill.